Last week the ratings agency Fitch downgraded Greek sovereign debt from A- to BBB+ over fears that it will default on its payments. Two most steps and it's junk bond time. The Greek budget deficit is now running at 12% - the rules of EMU allow a maximum of 3%.
Of course most of the Med countries have broken the Euro rules now. Even Germany is slightly over. (Of course the UK is almost as bad as Greece, but we're not in the Euro so don't have to follow their rules.)
As a measure of how the markets regard Greece it costs over $200,000 to insure $10m of their debt, compared to $85,000 for the UK, or $25,000 for Germany. The markets seem to think default is a distinct possibility.
It doesn't help that the Prime Minster, George Papandreou, is a dyed-in-the-wool socialist who cannot countenance Irish-style pay cuts for public workers, or even wage freezes.
There is now a serious inter-generational war going on in Greece. Young people have few prospects of a job, while their parents' generation are in protected and secure employment, funded directly or indirectly by taxes. We have already seen rioting in the streets.
The ECB would like Greece to impose IMF-type austerity measures including mass-public sector pay cuts and redundancies. Usually the IMF would prescribe devaluation of the currency as well, but with Greece in the Euro that's not possible. The pain will all have to be taken on the chin.
So, either the Greek government cracks, cuts spending and is probably booted from office, or, Brussels cracks and starts giving money to Greece to continue living beyond its means (German taxpayers would love that!) or Greece simply leaves the euro, reverts to the drachma, and devalues - thus stoking their economy and reducing their debt.
My money is on some sort of fudged bail-out from Brussels.